A selection of weekly articles by top Bahamian commentators.

March 20, 2012

Drilling for Oil Produces a Lot of Gas in Bahamas

by Larry Smith

In recent weeks, the Democratic National Alliance has tried to gain political mileage by stirring up a controversy over oil exploration. But rather than focus on the substantive issues in a constructive way, they chose to launch a series of personal attacks and conspiracy charges - not a good move for a party that was supposed to change our tribal politics.

In view of the enormous international pressures and revenues that can be expected, together with the dramatic changes to our way of life that are implicit in future oil production, not to mention the incredible pollution risks, it is worth taking a closer look at this issue - particularly in the context of the accusations of cover-ups and carve-ups.

Our original petroleum act was passed in 1945 to facilitate exploration by Gulf Oil, Standard Oil, Superior Oil and Shell. It was replaced by legislation enacted by the Pindling government in 1971, which came into effect seven years later and remains in force today.

The last test well was drilled here in 1986 by a company called Tenneco, and while no commercial production followed from those early explorations, there were oil shows and most experts are convinced that large quantities of petroleum lie beneath our seabed.

The Christie government awarded a British group (later constituted as the Bahamas Petroleum Company) five new exploration licenses covering just under four million acres in 2006. The licenses became effective just before the last general election, in April 2007, when they were signed by the governor-general. And for the past several years BPC has been conducting geophysical research in the Bahamas.

Now BPC says it is preparing to conduct appraisal drilling south of Andros, and the DNA thinks this amounts to a conspiracy involving secret deals with government officials. The party has set up a Facebook petition on oil exploration, asking Bahamians to sign "If you think we should control our resources to benefit all Bahamians, so we can demand answers before it's too late."

From its commentary, the DNA is clearly not opposed to drilling, but simply trying to stir the pot. This is not necessarily a bad thing, but it depends on how it is done. Accuracy and honesty are important when making public statements on complex issues. Publishing false statements and facilitating wild allegations leads to a rapid loss of credibility.

For example, according to the DNA, "this government negotiated a 12.5 per cent (royalty), one of the worst in any country." In fact, it was the Pindling government - back in 1971 - that set a then industry-standard minimum royalty rate of 12.5 per cent "of the selling value at the well-head of the petroleum won and saved from the licensed or leased area".

And, contrary to what the DNA alleges, the licenses awarded to the Bahamas Petroleum Company in 2007 set a sliding scale of 12.5 to 25 per cent of production value based on the quantity of oil produced, a fact which BPC clearly states on its website.

Those licenses were never renewed, because the government imposed a moratorium on oil exploration in 2008 while efforts were made to pin down precise maritime boundaries with Cuba, the US and the UK/Turks & Caicos Islands. The boundary with Cuba - along which four of the BPC licenses are located - was finalised last October.

But in 2010 - following the catastrophic Gulf of Mexico oil spill - the government decided to step back to review the entire petroleum policy framework before allowing exploration to resume. The Ministry of the Environment also required license holders and new applicants to produce environmental impact assessments for the areas they wished to explore.

There are currently seven approved licenses for oil exploration in Bahamian waters, and 10 applications for new licenses have been submitted since 2008. Five of the approved licenses are held by BPC. The other two are held by an American company called Liberty Oil, but are in suspension because of the failure to remove a sunken barge from an Abaco reef.

A US company called NPT Oil has applied for seven licenses covering more than six million acres north of Grand Bahama. NPT's Bahamian data and assets were recently acquired by Pennine Petroleum Corporation, an emerging oil and gas exploration and development company active in Alberta and Saskatchewan.

A Canadian geophysicist named Allan Spector has applied for an onshore license near Seymours on north Long Island. And a partnership between BPC and the Norwegian company Statoil has applied for licenses covering more than 2.3 million acres near the Cay Sal bank.

DNA Montagu candidate Ben Albury - who has led the party's campaign on this issue - says he is simply demanding transparency and information. But he has also accused Environment Minister Earl Deveaux of gross malfeasance, without any evidence, and has succeeded only in making the issue more opaque for the average Bahamian.

"My main issue," he told me over the weekend, "is the dodging of the questions by Deveaux. If you listen to his comments he makes it sound as if there is a moratorium on oil exploration, (but) BPC is telling the media that they intend to drill in the coming months."

Albury cites a Miami Herald article published last October, in which Dr Paul Gucwa, BPC's chief operating officer, refers to plans for an exploratory well by the end of this year.

"The Bahamian government has a moratorium on granting new exploration licenses," the Herald reported, "but...that could change following the country’s May general elections. BPC has contacted 10 major international oil companies about partnering in its oil exploration operations."

A review of Deveaux's statements on this matter over months, if not years, shows an entirely consistent position. He has repeatedly stated that the exploration freeze will remain in effect until an updated regulatory system has been put in place. He has also said that the present government is committed to the widest possible public consultation on the issue of oil production.

However, if you listen to the talk shows, some Bahamians are already gearing up to stop work and collect their 'black gold' dividend cheques, while others are concerned about secret backroom deals in which the well-connected carve up the country's seabed for their personal benefit.

As mentioned earlier, experts have believed for decades that large quantities of oil and gas lie beneath the Bahamian seabed, and now that drilling technologies and market conditions have reached the point where exploitation is not only feasible but profitable, we can reasonably project a massive influx of petroleum revenues in the near future.

But that is precisely why the government is seeking to overhaul our legislative, environmental and financial regimes, so as to lay the groundwork for the orderly development of this industry (whether you like it or not). As Deveaux told me over the weekend:

"Without detailing all the issues inherent in something so materially significant, it is a clear responsibility of the government to prepare the country for oil and its likely consequences."

The DNA appears confused because under existing Bahamian law, licensees are required to drill an exploratory well within a certain timeframe - which in BPC's case is prior to April 2013 - or risk forfeiting their rights. The company says it has completed the required environmental impact assessment for a test well and is already working on a management plan.

Meanwhile, Environment Ministry officials have met with their counterparts in Norway to discuss revisions to the existing act and regulations, and consultants have produced working drafts for the government to review, after which they will go to the attorney-general. Deveaux says the proposed regulatory system will be included in his hand-over notes for the next government.

"Our visit to Norway in December was very useful and the government has agreed in principle to apply that country's policies as a guide in developing a Bahamian petroleum industry," Deveaux said.

Norway began offshore petroleum production in 1971 and is now the world's seventh largest oil exporter and second largest gas exporter, with some 600 leases awarded to a variety of companies.

Norwegian officials have advised the Bahamas to ensure that all the essential elements of oil and gas governance are in place before any drilling begins. These include environmental, safety, tax, revenue, training and employment policies; contingency plans; and insurance requirements.

Norway's national petroleum policy seeks "to ensure long term management of, and value-creation from, the country's petroleum resources." Oil and gas activities are restricted to offshore waters, and all subsea resources are vested in the state, which is charged with managing them for the benefit of society as a whole.

As we said earlier, under the current Bahamian act, an exploration license includes an obligation to drill, and a bond must be posted to that effect as a way of discouraging speculators. Exploration licenses are awarded for an initial term of three years, renewable for two successive three-year periods, but the 2008 moratorium meant that BPC's original licenses were put on hold and never technically renewed.

Similarly, if BPC's exploration is successful, current law says it is "entitled" to a renewable 30-year lease to begin commercial production. The royalty rate for production of oil and gas is based on a sliding scale of 12.5 to 25 per cent (from which the lease fee is deducted), with no other taxes or fees required. Equipment can also be imported duty-free.

On its website, BPC says its license expires on April 26, and it has applied for renewal. The company maintains that "the governor-general shall renew the licences for another three years provided the company commits to drill an exploration well and (starts) the well before the end of the first renewal year, i.e., by April 26 2013."

So there is clearly some tension between the positions of the government and BPC, which claims to have invested $50 million so far to explore. Appraisal drilling is projected to cost several hundred million more, and obviously the company expects to benefit from this investment. But the petroelum act was written 40 years ago, and is silent on many of the complex issues the Bahamas would face as an oil producer.

Meanwhile, the DNA has rightly argued that oil drilling threatens two of the country’s biggest industries - tourism and fishing. "(We) demand to know if Mr. Deveaux and the FNM government have ensured the protection of Bahamian interests," Ben Albury says. Well, the short answer is that Deveaux has repeatedly talked of the need to train Bahamians to manage a more robust regulatory environment.

"We have to come to the public with full information," Deveaux told me. "We want a standard of management similar to that of Norway. We need a petroleum directorate that is fully staffed with a range of expertise, including financial. If oil is produced we will be dealing with billions of dollars, changing the whole culture of the country and the way the government deals with money. It is no small thing."

In Norway, for example, surplus oil revenue is deposited in a $600 billion sovereign wealth fund so that the country's non-renewable resources can benefit future generations. The fund is managed by the central bank and is responsible to parliament, with the interest used to cover government pension obligations.

Consultants have also advised the Bahamas to increase royalties and adopt profit sharing with oil companies in order to compensate for the absence of a corporate income tax.

As noted earlier, BPC's licenses were awarded by the Christie administration in 2006, and signed by former Governor-General Arthur Hanna in April, 2007. It is noteworthy that PLP candidate Jerome Gomez is the company's resident manager, former PLP cabinet minister Sean McWeeney is its senior counsel, and PLP deputy leader Brave Davis' law firm is the company's onshore legal advisor.

What is even more noteworthy is that the PLP has so far ignored this important public debate. The FNM's position is that "nothing can happen until the government approves and nothing will happen until there is public consultation." The DNA says it will hold a national referendum on oil exploration and production. The PLP is heavily conflicted in this matter and has been silent.

Thanks for the detailed article on oil drilling. I have been following BPC for a while now, and you don’t have to be Einstein to figure out something is up.

In just a matter of weeks the share price went from 5 pence a share to over 15 pence…a 300% increase. It has since settled to around 12.5 pence +/- per share ( I imagine from profit takers).

You don’t have that kind of increase in that short period of time unless something is up.

Furthermore, don’t think for a minute these politicians don’t have their hands, legs, toes, fingers all over this. They are going to make a fortune.

I predict we will not go the Norwegian route where its citizens prosper over these type of ventures/risks, but will take the Trinidadian type route where the resources and wealth created is huge, but its majority of citizens remain poor while the MP’s and their families’ line their pockets.

I enjoyed your article in today's Tribune although I think I have been misunderstood. I would love the opportunity to discuss this issue with you further so you may understand my true position and motive.

Deepwater Horizon type blowouts are not the main worry. It is the persistent low-level leakages that pose a serious threat to the Bahamian Environment. If the North Sea regulators can't get it right what do you think will happen here.

The Bahamas will be one of the first countries to feel the pain of increasing energy costs. The cost of oil will rise, expecting to increase exponentially over time. The cost of living in the Bahamas will sky rocket. And, as oil costs go up, you can expect tourism to decline. In just the last 3 years, the round trip travel costs between Albuquerque, New Mexico, USA and Nassau, Bahamas has tripled! It is high time for the Bahamas to carefully evaluate their energy resources. If significant oil deposits do exist in the bahamas, it wouldn't be smart to extract it and sell it off for a short-lived economic boost to the country ... just to pad the pockets of a greedy few. Indeed, the future of the country hinges more on energy than on any other factor. It is questionable if the natural resources in the Bahamas are great enough to even sustain its current population. Policies for energy resource conservation are necessary. Without these policies, in 25 years, the Bahamas will be more like it was 100 years ago. It is entirely possible that the Chinese population could become the majority population of the Bahamas in that time. It will be wise for the Bahamas to preserve their oil resource for as long as possible.